How to measure innovation

Most people who think about innovation, and we are a growing breed, look at it as a set of outputs. How many patents does a company have? The answer drives the Thomson Reuters annual Top 100 innovator rankings. How does a company’s innovative track record affect its stock price? That’s the question Forbes asks to arrive at its top 100 list.

These tables are very widely distributed – Forbes is shared more than 10,000 times on social media. But ask yourself – what value do they have for the companies on them or for companies who want to improve their innovation capability? I think the answer is next to zero. They are part of the reputation machine that has grown up online.

When I recently tried to correlate innovation reputation with both stock price and profitability, the connection was actually very slim. Working with data providers MarketPsychData we found that the top 10% of companies by reputation will see a stock price premium twelve months later, after establishing its reputation as “innovative”. Plus, that premium only applies to the top 10% of companies – the ones best at promoting their reputations. For the rest, the correlation is too weak to talk about.

This suggests that the premium is due to a company’s ability to talk up its game (think Google), rather than truly superior intrinsic capabilities. Of course that is cynical, and some top companies like Nike (the overall winner in our innovation analysis) do have very broad innovation capability.

Need for new innovation metrics

We need a set of input metrics that measure how capable companies are, so we can separate reputation from capability and help companies focus on areas for improvement.

I created a suite of input metrics for the Elastic Innovation Index – a table of 50 companies measured by innovation capability (the project was supported by Bluefin Solutions in the UK). The capabilities range from social to leadership to strategy to business process, and platform, data and analytics.

My argument is simple. If a company is to prosper in very uncertain markets then it needs a wide-ranging capability to do new things.

In total, we surveyed over 5,000 companies across 7 stock markets to find 100 that were strong on reputation. We then scored these across 35 criteria such as whether or not they had a senior executive with start-up experience, how much they patented, whether they externalized key processes, their reputation for design and so on.

Here’s a figure to illustrate the relative strength of different sectors seen through these criteria:

The diagram shows you that only the tech sector enjoys high capability and high intensity, where intensity indicates the gap between leader and laggard in any given sector. When we compiled a top ten list per sector we found that in tech and finance, companies were fairly closely bunched.

At the same time, the analysis suggested a big gap between companies that are developing innovation capability and those that are not. That is truly a sectoral problem.

New skill sets required

Innovating today requires a new collection of skills. The diagram below illustrates some of those new skills, and new ways of thinking, that go together to make a company innovative.

As an example of how exacting business can be these days, take a look at social. To be good at innovation a company needs more than social media presence – it needs to be good at bringing customers into a collaborative relationship and keeping them there. It also means growing that inner circle through a product development cycle. I’ve written previously about lean innovation and how a company must “hack” growth and scale the conversation around its products. Increasingly companies will need to be good at some kind of crowdsourcing or even crowdfunding – look at Google Glass.

Few companies outside tech and telecoms are paying attention to these wider skills sets. That creates risk. The biggest risk companies face these days is simply not knowing what to do – it is hard deficit to uncover and even harder to acknowledge. The Elastic Innovation Index is meant to help.

In future posts, I’ll look at how banks and companies in healthcare – two of the lower-scoring sectors – can improve their innovation environments.